An MKV, AVI, VOB (container used for DVD), M2TS are containers. Inside that container there are multiple streams. Video, audio, subtitles, attachments, etc. Demux'ing separates all these files from the container. So you'll now have separate files for each stream. Muxing is putting all these files back in to a container. I am about to rip a bluray right now. I'll take a few screenshots and make a little walk through.

Tinkerbell is one expensive BD, my heart would likely skip a few beats if i saw that.